Keppel REIT DPU Decreased but Manager Management Fees Increase

I held 7% of office REITs in my stock portfolio, mainly made up of Keppel REIT and Frasers Commercial Trust at 5% and 2% respectively.

Keppel REIT has announced its 4Q2016 financial results on 24th January 2017. A set of pretty disappointing results which reflects the weakness and headwinds in office REITs in current economy. I expect headwinds but didn’t expect results to be so bad. This is in consideration that Keppel REIT sold its 77 King Street asset at 40% profit at A$160 million. Where is the profit attributed to share holders? (Read point number 6 under Investment Risks below)

Gearing ratio as at 31st December 2016 is at 38.5%. Perhaps most of the profit from the sale of 77 King Street has been used to repay its debt.

Although the portfolio occupancy is at 99.2%, Keppel REIT achieved an average signing rent of $9.60 per square foot for its Singapore offices. This is slightly higher than the current rent of $9.10 per square foot for Grade A office rental rate.

4Q2016(S$’000)

4Q2015(S$’000)

Change

Gross Revenue

40,001

42,795

(6.5%)

Net Property Income

31,422

34,771

(9.6%)

Distributable Income

48,716

54,031

(9.8%)

Distribution Per Unit (“DPU”) (cents)

1.48

1.68

(11.9%)

2016(S$’000)

2015(S$’000)

Change

Gross Revenue

161,252

170,347

(5.3%)

Net Property Income

128,370

137,465

(6.6%)

Distributable Income

208,123

217,268

(4.2%)

Annualized Distribution Per Unit (“DPU”) (cents)

6.37

6.80

(6.3%)

Dividend Yield

At a closing price of S$1.02 on 30th December 2016 and annualized DPU of 6.37 cents, the dividend yield for Keppel REIT is a merely 6.2%.

Investment Risks

1. Weakening Office Rental Rates

From the chart below, you can see the average grade A rental rates trending lower and lower. Occupancy is driven up by banking and Fintech companies in 2016. However, we can see Fintech slowing down in 2017 and personally my thought is that Singapore is pretty slow in adapting and investing in Fintech.

2. Demand and Supply

The rental rate is basically based on supply and demand. The following is forecast was taken from Keppel REIT presentation slides. It shows there is still a pretty high supply of office space in 2017.

The new office supply are

2017 – MarinaOne (>30%(4) pre-committed)

2018 – Frasers Tower and redevelopment of Robinson Towers

2019 – Redevelopment of Funan DigitaLife Mall

2020 – 79 Robinson Road (Former CPF Building)

4. Bugis Junction Tower

Keppel REIT has mortgaged its Bugis Junction Towers for a 5 year revolving loan facility of S$350 million. The income from Bugis Junction Tower is estimated 13% for 2016. Ocean Financial Centre income contribution is 66% with 275 George street income contribution at 12% and 8 Exhibition street at 9%.

The risk here is that should Keppel REIT defaults on its loan, Bugis Junction Towers will be taken over by the bank since it is used as a secured collateral for the loan. The financials will be greatly impacted.

5. New Chief Executive Office

With the resignation of Ms Ng Hsueh Ling, Chief Executive Officer of the Manager, Ms Jesline Goh will take over as Chief Executive Officer from 1st February 2017. It is unknown what will be the strategic direction for Keppel REIT will be with a new leadership taking place.

6. Growth in Management Fees

Manager’s management fees increased 1.1% in FY2016 as compared to FY2015. This does not seem to be inline with distribution per unit as managers still get a fatter pay check and unit holders get a reduction in DPU.